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After the Credit Crisis: Best Practice in Banking the High Net Worth Individual

By: Steven I. Davis
Published: 16 February 2009

After the Credit Crisis

Managing the wealth of individual clients has been one of the banking world's most attractive businesses over recent years.

The current banking crisis has posed multiple challenges to the wealth management model and in addition, the sale of "toxic" products has created further reservations.

Over the long term, the prospects for the sector remain positive with projected annual global asset growth, albeit at a slower rate, with higher growth rates within selected emerging markets.

This report analyses how banks manage this segment to maximise their long term earnings contribution.

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Research has been gathered from relevant material in the public domain, case studies of successful practice and insights gathered from in-depth, off the record interviews with senior private banking practitioners, researchers and consultants providing a research report which provides scope, segment and profile to the market as a whole.

Report Content

  • Drivers of the high net worth segment
  • Placing the high net worth client in the wealth management context
  • The client and their needs
  • Products for the high net worth client
  • Alternative providers
  • How the organisation delivers the service
  • Regulatory issues
  • Profitability
  • Case studies

Who should read this?

  • CEO's, heads of strategy/marketing within commercial banking
  • CEO's, heads of strategy within private banking
  • Heads of banking or wealth management practice within banking consultants
  • Professors of marketing, banking or wealth management within academics

Managing the wealth of high net worth (HNW) individuals – roughly defined as those with at least $1 million equivalent – has been one of the banking world’s most attractive businesses over the period 2002-2007.

Driven by the steady global expansion of personal wealth, in particular in the emerging markets, as well as buoyant financial markets until mid-2007, wealth management has enjoyed not only annual revenue increments of 5-10% but also steady margins on assets under management of roughly 100 basis points, and pre-tax margins of about 35 basis points on these assets, along with superior returns on the relatively low regulatory capital employed. Banks ranging from management-owned private banks to major retail institutions to global investment banks have built successful strategies based on a mix of advice and the sale of a wide range of products.

The banking crisis of 2007-8, however, has posed multiple challenges to this model.  The collapse of equity markets globally has undermined the secular growth trend, with 2008 presenting the first annual decline in global wealth since 2002. Not only has the base of revenue-generating assets under management thus fallen, but also margins on that base have shrunk considerably with the collapse of interest in high-margin alternative products such as structured investments tied to a market index. Thus there has been considerable publicity over research in late 2008 highlighting the apparent outperformance of cash as an asset class over the past decade- hardly an advertisement for advisors charging fees based on performance. Perhaps more important, however, the vital relationship of trust in many wealth management advisors has also suffered. A material consequence of this damage has been the threat – and reality – of litigation across the globe against the wealth managers who ‘sold’ such toxic products.

The revelation of the Bernard Madoff fraud in December, 2008 was a sad milestone in recent wealth management history. Not only is it by far the largest, at an estimated $50 billion in losses, but also the most widespread and unexpected fraud in financial history. At a minimum, as the drama unfolds in the months to come, it will oblige wealth managers to increase their due diligence, clients to review the credibility of their provider, and hit the bottom line for the banks who feel obliged to make good their customers’ losses.

It is difficult to predict the outcome of this turbulence. One impact, however, has been re-examination of their business model by many banks. The net beneficiaries of the turbulence appear to have been the pure private banks and dedicated advisory firms, with the losers some global investment and commercial banks who are associated with the sale of toxic products.

Over the long term, however, the prospects for the sector remain positive. Consultants project continued, albeit slower, global asset growth in the single digits annually, with higher rates from selected emerging markets such as China, India, Brazil and the CEE (Central and Eastern Europe). A large proportion of investors in such markets do not yet have a wealth management advisor.

A critical success factor for all firms is the ability to attract and retain the pool of qualified relationship managers which distinguish this business from most other financial services. A significant portion of the client base follow their advisor if he leaves the bank, and competition for such skills will probably ensure that the share of client revenues paid to relationship managers will increase.

While the outlook for private banks and personal advisors untainted by recommendations to buy toxic assets is relatively favourable, that for the investment banks that created and sold the products is less positive. In between is the large mass of large retail banks, some of whom have not yet focused strategically on the HNW client segment despite their great advantage of an existing HNW client base already on their books.

The good news for many commercial banks is that the banking turmoil has focused their strategic attention on building a deposit base and the associated client relationships. Our research indicates that wealth management is thus one of the few segments which will gain traction as a result of the current crisis.

The challenge for such banks is to build a brand in the market, attract and retain the necessary relationship management talent, and invest in the necessary infrastructure. While not all will succeed, the strategic attraction is clear in the post- crisis environment: a business likely to grow in the long term, a relatively low capital commitment, the presence of an existing relationship and brand aware- ness, and demonstrably attractive margins.


1 . Introduction  

2 . The Drivers of the High Net Worth business

3 . Placing the high net worth client in the Wealth Management spectrum

4 . The Client and his needs  

5 . Products and services for the High Net Worth Client

6 . Alternative providers - The different competitive models

7 . The Operating model -delivering the service

8 . Reputation and regulation   

9 . Profitability

10 . Profile of key geographic regions

11 . Case studies of success

12 . Findings and conclusions   

13 . The outlook


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